Use this button to switch between dark and light mode.

Navigating Emerging Legal Issues Surrounding the Virtual World of NFTs

April 08, 2022 (3 min read)

By Kevin Hylton| LexisNexis Practical Guidance Podcast

In the last couple of years, most of us have become acquainted with a new entrant to the global vocabulary: the virtual world of Non-Fungible Tokens (NFTs).

“NFTs have existed since at least 2017 but exploded in popularity in 2021,” said Daniel Barsky, an IP partner in Holland & Knight’s Miami office, and the author of “Non-Fungible Tokens and Intellectual Property Law,” a comprehensive article published by LexisNexis Practical Guidance.

“An NFT is a unique, one-of-a-kind crypto token that is managed on a blockchain — a type of decentralized ledger that, like a bank ledger, records transactions between the various users of the blockchain,” Barsky wrote. “In the NFT context, the blockchain tracks and reports the ownership and transfer history of NFTs.”

Barsky explains that there is a critical difference between NFTs and the other types of tokens, such as cryptocurrency, that exist on blockchains. While traditional cryptocurrency is fungible (e.g., one bitcoin is fundamentally the same as any other bitcoin), NFTs are non-fungible. This means that each and every NFT is, in some way, different from each and every other NFT.

There are a number of celebrities who have captured the public imagination with their efforts to create and sell NFTs, such as Reese Witherspoon, Jimmy Fallon and Eminem. A recent story that has surfaced a number of interesting legal issues surrounding NFTs is director Quentin Tarantino’s plans to sell NFTs from his classic "Pulp Fiction" movie, including original drafts of the script and never-before-seen audio/video clips from the filming of the movie.           

“There is now litigation underway in which Miramax, the studio that produced Pulp Fiction, has sued Mr. Tarantino, seeking to stop the NFTs auction by claiming that it violates Mr. Tarantino’s agreement with Miramax,” Barsky said. “Obviously, the agreement does not contain any language regarding NFTs because it pre-dates the creation of NFT technology. So the battle is going to turn on whether Mr. Tarantino’s original IP rights encompass NFTs in the new virtual world, allowing him to remonetize his original creative work.”

Barsky notes that the recent headlines regarding the sale of celebrity-backed NFTs has raised public awareness of this novel technology, and is certain to result in the proliferation of all sorts of legal questions and challenges.

“Non-fungible tokens have captured the imagination of cryptocurrency enthusiasts, artists, collectors and lawyers — who say the burgeoning digital assets raise a host of legal questions spanning intellectual property rights, consumer protection and artist royalties,” Law360 reported.

For example, Barsky points to the emergence of new investment vehicles designed to make it easier for individuals to financially participate in the acquisition of NFTs. A Decentralized Autonomous Organization (DAO), in which individuals form a private group with their own rules that are encoded into a community system of computers and networks, have been used to achieve this purpose.

“This is a really interesting concept and has already been used to purchase an NFT of the U.S. Constitution, among other prominent artifacts,” Barsky said. “It is an interesting way for people to invest in art, as opposed to the current model where only a single individual with sufficient wealth can acquire and enjoy the creative work.”

Of course, as with any burgeoning new asset class, there are also significant areas of potential malfeasance and fraud that have begun to appear.

“Among a string of incidents, hackers swiped NFTs valued at $2.2 million in January from New York art collector Todd Kramer,” CBS News reported. “A month later at OpenSea — the world's largest NFT market — an estimated $1.7 million worth of NFTs were stolen in an alleged phishing scam. And users of the MetaMask, one of the most popular crypto wallets, routinely report unauthorized transactions.”

In fact, Barsky noted that OpenSea ultimately admitted that as much as 80 percent of the NFTs minted using their free minting program were counterfeit, fraudulent or in some other way not legitimate.

“It’s going to be interesting to see how future regulation of NFTs plays out because a large section of this community doesn’t seem to particularly care if the tokens they trade are fraudulent or not,” he said. “There are definitely some parallels with the physical world in which we have these threat actors out there who are trying to sell stolen or misappropriated art in the form of NFTs.”

I had the privilege of interviewing Mr. Barsky for a recent episode of our “Practical Guidance Podcast,” where we invite experts to provide insights on timely issues for legal practitioners. Listen now or download the episode regarding emerging copyright infringement, investment and regulation issues surrounding the virtual world of NFTs.